Great Britain and the European Union

Keynesian Economic Theory

Currently the world is going through a financial crisis and it very much so is global in nature. As Congress in the United States is dealing with the debt ceiling and fiscal cliff, Europe has its own set of practical arrangements that are being tested in the dangerous condition and which have worsened their sovereign debt crisis. The monetary union is being subjected to irregular shocks through external competiveness and trade. With the inability to adjust exchange rates, these pressures are forced into the labor market and unemployment. This has led some countries over past years to try to improve pressures with fiscal shortage. The resulting indebtedness has been intensified by the financial crisis and recession, and this, in turn is contributing to underlying financial instability. Keynesian economics have been a key contributor to both the positives and negatives in the European Union. In this essay I will thoroughly explain Keynesian economics and make arguments on why the European Union needs a fiscal union.

Keynesian economic theory is a theory that states, active government intervention in the marketplace and monetary policy is the best method of ensuring economic growth and stability. The theory believes it is the government's job to smooth out the hard times in business cycles. Intervention comes in the form of government spending and tax breaks in order to stimulate the economy, and government spending cuts and tax hikes in good times, in order to curb inflation.

 John Keynes believed that aggregate demand is affected by both public and private and that it behaves unpredictably. This means that the total demand for goods and services are ever changing and that there is no one way to determine the demand. In this case, the public sector (European Union) has the responsibility to make decisions that will influence the private sector. The decisions that are most important include those on monetary and fiscal policies....